The New Commodity Rally

Commodity prices have been rallying hard since mid-June. The Bloomberg index is up about 6% but more importantly for us, iron ore has surged 32% and coking coal the same.

The reason is simple: China’s property market is running again: national sales volume rose 21% in the year to June.

The question for investors is whether it’s a fundamental turning point for Chinese property, or a mini-rally in the long-term downtrend; it looks more like the latter than the former, although housing inventories are apparently at the lowest level for six years, so there’s unlikely to be any big reversal in the short term.

Construction starts and real estate investment figures are both up about 10% in the first half and GaveKal’s analysts reckon that building activity looks likely to stay strong until the end of the year.

But the sales rebound in June is the third mini-cycle since the peak in 2016.

Commodity prices rallied during the last mini-rally in January-February and then fell again after that. Unless there’s an easing of monetary policy, which seems unlikely, lending will tighten as the year goes on and property sales should resume the decline.

There’s also likely to be a supply response to lift in prices, especially from coal and iron ore mines in China.

None of which foreshadows a crash, but it’s probably not wise to assume the commodity rally is going to last all year.